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As Sears Canada works to win back shoppers, the parent company in the U.S. unloads all but 51 per cent — and perhaps as much as 95 per cent — of stock in the Canadian operations.

People walk past the main Sears store in downtown Vancouver, British Columbia February 23, 2011. (ANDY CLARK / REUTERS)

Sears Canada's shares are being dumped by parent company Sears Holdings. It currently owns 95 per cent of Sears Canada and expects to divest between 51 and 95 per cent . (Michael Dwyer / AP)

By Francine KopunBusiness Reporter

Thu., May 17, 2012

In an effort to impress Wall Street, Sears Holdings Corp. announced Thursday it will reduce its stake in Sears Canada by nearly half and sell off other real estate holdings to restore profitability and shareholder confidence.

The parent company of Sears Canada, based in Illinois, will reduce its interest in Canadian operations to 51 per cent from 95 per cent.

It has also reserved the right to sell the rest of its shares, potentially severing ties with Sears Canada.

A date has not been set for the transaction and it must be approved by regulators.

The moves come as Sears Canada struggles to improve performance against a backdrop of increasing competition. Discount retailer Target arrives in Canada in 2013 and competitors from Wal-Mart to Lowe’s are planning expansion and growth in 2012 and beyond.

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Sears Canada Inc. CEO Calvin McDonald said Thursday that Canadian operations will be unaffected by the redistribution of shares.

“From our perspective, it doesn’t really change our focus on transformation and growth,” said McDonald, who is preparing Sears stores in Barrie, Belleville, Newmarket and the Lime Ridge mall in Hamilton for a relaunch next week.

Sears has been on the defensive with Wall Street because of years of declining sales at Sears and Kmart stores in the U.S.

Spinning off its Canadian operations will allow the parent company to focus on turning around its U.S. business, according to the company.

Earlier this year, Sears also announced that it was spinning off its smaller Hometown and Outlet stores as well as some hardware stores in a deal expected to raise $400 million to $500 million (U.S.). At the company’s annual meeting earlier this year, Lampert said that real estate sales were important to restore profitability and to get shareholders’ confidence back.

Investors rewarded Sears Holdings Corp. Thursday for the move, pushing the share price up $1.55 (U.S.) to close at $52.42 in New York. Sears Canada shares dropped $1.68 (Canadian) to close at $11.45 on the Toronto Stock Exchange.

The Sears Canada shares to be disposed of by the parent company will be distributed as dividends to existing Sears Holdings Corp. shareholders.

The biggest beneficiary of the deal would appear to be U.S. hedge fund manager Edward Lampert, chairman of the board of Sears Holdings Corp. Lampert is also the majority shareholder in the company, with 62 per cent of shares held by him or his affiliates, including his fund, ESL Investments.

Alan Middleton, professor of marketing at the Schulich School of Business, York University, said he’s interested to see what other shareholders think of Lampert’s plan.

“It’s not giving them a lot of value,” he said.

Lampert spent years fighting hedge fund manager William Ackman over shares of Sears Canada Inc., finally paying him $30 a share in a $560-million deal in 2010.

In 2010 when Lampert sealed the deal with Ackman, Sears Canada had $1.3-billion in cash assets.

It now has $361.6-million in cash and cash equivalents, according to the first-quarter report released on Wednesday. It issued extraordinary dividends to shareholders of $7.50 per share in 2010, totaling $753.4-million.

Since taking over as CEO and president of Sears Canada 10 months ago, McDonald has focused on paring expenses and beefing up product categories.

Revenue, same-store-sales and EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization and Non-Operating Activities) were down in the first quarter of 2012. Net earnings were up due to a one-time payment for terminating leases in prized locations in Calgary, Ottawa and Vancouver.

But operating expenses were down 5.9 per cent compared to 2011, and there were positive increases in mattresses and major appliances, where Sears has been investing in sales and presentation.

“We just have to get that type of consistency across the entire store,” said McDonald.

He said Sears Canada has a strong balance sheet with no debt.

“The basic economics of our business are very good,” said McDonald.

Sales associates at Sears will be unaffected by the share transfer, although it will make it easier for them to buy shares in the store they work for, he said.

Analyst Keith Howlett of Desjardins Securities rated the impact on stock as neutral.

“This action was not expected, as Sears Holdings has gradually increased its shareholding in Sears Canada from 55% in 2004 to 95% presently. Many thought Sears Canada would be privatized within the next several years,” he wrote in a note to investors.

He pointed out that control of Sears Canada will remain with Sears Holdings and Lampert.

“We would expect most public shareholders of Sears Holdings, other than Mr. Lampert, to be sellers of the Sears Canada shares that they receive in the spin-off,” said Howlett.

“While all options to realize value from Sears Canada still remain open to Sears Holdings, it appears to us that the new executive management of Sears Canada has been granted at least a couple of years to establish if its plan can turn operating results around.

“This was not necessarily what minority investors in Sears Canada had expected. However, it should boost management and employee morale as the organization girds itself for battle with Target, Lowe’s and Wal-Mart,” he wrote.

Maureen Atkinson, senior partner and retail consulting specialist at J.C. Williams Group, said the sale is probably a good thing for Sears Canada. The U.S. parent company has been harvesting Canadian profits without reinvesting in the stores.

“They used them as a cash cow. They’ve drained their resources and that’s left them with a lot of problems,” said Atkinson.

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